Suppose a bank is operating with a leverage ratio of 10.A 6 percent increase in the value of assets
A)will reduce liabilities by 6 percent.
B)will result in a 60 percent increase in owner's equity.
C)will result in a 60 percent decrease in owner's equity.
D)will reduce liabilities by 10 percent.

Question

Quizplus · Accepted Answer

A leverage ratio of 10 means that for every $1 of equity, the bank has $10 of assets. A 6% increase in assets would lead to a 60% increase in equity because the increase in assets is leveraged by the same factor (10 times).

Suppose a Bank Is Operating with a Leverage Ratio of 10.A